Why the energy politicians are squaring up on ring-fencing
Energy secretary Ed Davey faced a grilling from MPs in the House of Commons today on competition in the energy market, following regulator Ofgem’s new liquidity and transparency rules, which were published yesterday.
Currently, the big six – that have both generation and supply arms – can sell themselves energy, which some smaller suppliers and Labour claim gives them an unfair advantage in the wholesale market.
“There is a lot of work to suggest that it is not at all clear that vertical integration is bad for consumers; it may be in some cases, but it will not be in others,” said Davey today, in response to Labour’s shadow energy minister Caroline Flint, who supports the introduction of ring-fencing.
The theory behind this is pretty clear: vertical integration was adopted so that people could hedge the risks between generation and supply. That can lower the cost of capital and lower prices for consumers.
Conversely, independent supplier First Utility claims that self-supply increases costs by approximately £30 per household per year. It argues that changing the market could save UK customers almost £1bn from energy bills.
Davey refused to confirm that he was ruling out a ban on self-supply and instead pushed the burden onto the findings of the regulators’ competition commission review, due at the end of March: “We provide the evidence and we allow independent authorities to make judgments on that.”
A spokesperson from Ofgem told City A.M. yesterday that it had no plans to implement a self-supply restriction. But Labour has said it will get rid of Ofgem and create a new regulator if they get into power next year, so there are no guarantees as to what will happen next.